Simmons First National Corporation (SFNC) Q1 2012 Earnings Report, Transcript and Summary

Good day and welcome to the Simmons First National Corporation First Quarter Earnings Conference Call. As a reminder today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. David Garner. Please go ahead sir.

Good afternoon. I am David Garner, Investor Relations Officer of Simmons First National Corporation. We want to welcome you to our first quarter earnings teleconference and webcast. Joining me today are Tommy May, Chief Executive Officer, David Bartlett, Chief Operating Officer, and Bob Fehlman, Chief Financial Officer. The purpose of this call is to discuss the information and data provided by the company in our quarterly earnings release issued this morning. We will begin our discussion with prepared comments and then we will entertain questions. We have invited institutional investors and analysts from the invested firms that provide research on our company to participate in the question-and-answer session. All other guests in this conference call are in a listen-only mode. I would remind you of the special cautionary notice regarding forward-looking statements and that certain matters discussed in this presentation may constitute forward-looking statements and may involve certain known and unknown risks, uncertainties, and other factors, which may cause actual results to be materially different from our current expectations, performance or achievements. Additional information concerning these factors can be found in the closing paragraphs of our press release and in our form 10-K. With that said, I will turn the call over to Tommy May.

Thank you, David and welcome everyone to our first quarter conference call. Let me again apologize for my voice I'll try to keep it as high pitched as I can but I think will be able to make it through okay. In our press release issued earlier today Simmons First reported first quarter earnings of $6.4 million, an increase of $1.3 million or approximately 25.4% from the same quarter last year. Diluted earnings per share for Q1 '12 was $0.37 up $0.08 or 27.6% from Q1 2011. Obviously, we are pleased with the results of this quarter. We benefited significantly from continued pristine asset quality which has resulted in a reduction in our provision for loan losses, which I will discuss in more detail later. On March 31, total assets were $3.3 billion and stockholders' equity was $409 million. Our equity and asset ratio was once again a very strong 12.3% and our tangible common equity ratio was at 10.7%. The regulatory tier one capital ratio was 12.1% and the total risk based capital ratio was 23.5%. Both of the regulatory ratios remained significantly above the well capitalized levels of 6% and 10% respectively and rank in the 93rd percentile of our peer group based on national December 31 peer numbers versus our March 31 [indiscernible]. Simmons First has one of the strongest capital positions within our peer group as we have reported previously and obviously a portion of this capital has been allocated for our acquisition program and we plan to leave this portion of our excess capital available for this purpose based on the level of our capital, the slow growth in the economy and minimal growth in our balance sheet, we did not need to continue to accumulate more excess capital, as such we plan to continue to allocate our earnings less earned dividends in our reinstituted stock repurchase program. As you know last month, we increased our quarterly dividend from $0.19 to $0.20 per share. On an annual basis, the $0.80 per share results in a 3.2% return based on our recent stock price. Since our reinstitution, the repurchase program, we have repurchased approximately 274,000 shares at an average price of $24 and $0.78 with approximately 372,000 shares remaining under the plan. Net interest income for Q1 2012 was $27.7 million and the increased $884,000 or some 3.3% compared to Q1 '11. As discussed in our last conference call, the increase was primarily due to additional yield accretion, recognized as a result of updated estimates of the fair value of the loan pools acquired in our 2 FDIC acquisitions. According to GAAP each quarter that we estimate the cash flows expected to be collected from the acquired loan pools and adjustments may or may not be required. The cash flow estimate has increased based on payment histories and reduced loss expectations of the loan pools. This resulted in the increased interest income that is spread on a level yield basis over the remaining expected lives of the loan pools. The increases are expected cash flows also reduce about an expected reimbursements under the loss sharing agreements with the FDIC, which are recorded as in indemnification assets. The impact for Q1 '12 was a $3.2 million increase to interest income and a $2.8 million reduction in non-interest income with a pretax benefit to earnings of $407,000. Because these adjustments will be recognized over the remaining lives of the loan pools and the remainder as the loss sharing agreements respectively they will impact future periods as well. The current estimate of the remaining accretable year of adjustment that will positively impact interest income is $20.8 million and the remaining adjustment to the indemnification assets that will, reduce non-interest income is $18.3 million of the remaining adjustments we expect to recognize $8 million of interest income and a $7.2 million reduction of non-interest income for a net addition to pretax income of approximately $800,000 during the remainder of 2012. The accretable yield adjustments recorded in future periods will change as we continue to evaluate expected cash flows from the acquired loan pools. Net interest margin for Q1 2012 was 3.93% an increase of 6 basis points from Q1 '11 and 17 basis points from Q4 '11. Non-interest income from Q1 '12 was $10.7 million, a decrease of $1.9 million compared to the same period last year. As previously discussed, there was a $2.8 million decrease due to the reductions of the indemnification assets resulting from increased cash flows expected to be collected from the FDIC covered loan portfolios that we just discussed. Again, excluding the indemnification asset adjustment, non-interest income increased $899,000 or 7.1%. Let me take a moment to discuss some items that impacted non-interest income, first income earned from the sale of mortgage loans increased by $668,000 or 107% compared to last year. This improvement was primarily due to lower mortgage rates leading to a significant increase in residential refinancing volume. The second item, credit card fees, increased a $136,000 or 3.5% on a quarter over quarter basis. This increase was due to a higher volume of credit and debit card transactions. And number three, other non-interest income increased by $344,000 over the same period last year. This increase was primarily due to a $176,000 of gains on the sale of OREO and other assets. Additionally, we recognized a $180,000 positive and marked to market adjustment on an equity investment in a CRA qualified economic development entity. Moving on to the expense category, non-interest expense for Q1 2012 was $28.6 million a decrease of $1.3 million or 4.4% compared to same period in 2011. The decrease was primarily attributable to a $468,000, decrease in FDIC insurance 2011 merger relating cost of $190,000 with none in 2012 and the impact of our ongoing efficiency initiatives concerning our combined loan portfolio. As of March 31st 2012, we reported our total legacy loans and covered loans net of discounts at $1.7 billion a decrease of $154.8 million or 8.5% compared to the same period a year ago. However approximately $80 million of the decrease is related to FDIC covered loans, which we would anticipate leaving a decrease of $75.7 million or 4.7% in our legacy portfolio from Q1 2011. Approximately half of this decrease is associated with 2 items. Student loans $13 million and a single construction loan of $23 million that we discussed in our previous earnings teleconference. On a positive note as you know our company experiences seasonality in our loan portfolio and due to agricultural lending and our credit card portfolio. While the loan portfolio decreased $36 million on a linked quarter basis, when you normalize for seasonality, and the continued decline in student loans the decrease was only $1.7 million, which is a significant improvement from previously discussed seasonally adjusted linked quarter numbers, in fact are now some states back to Q4 2008 obviously the midst of the economic crisis. While each of our 8 banks are beginning to report some improvement in their local economy, the proof of the pudding will be in the pipeline, during the last quarter that we have seen some slight improvement in our pipeline primarily from the Central Arkansas region. Likewise, we have received reports that the economy and loan demand is showing some improvement in the Northwest Arkansas region and the Northeast Arkansas region continues to show modest loan growth. While it is too early to call, we are cautiously optimistic about the beginning of a somewhat improved loan pipeline. Although the general state of the national economy, they show signs of improvement. It remains somewhat unsettled. Also despite the challenges in the Northwest Arkansas region that we've seen over the last several years. Overall our company continues to have good asset quality. As a reminder covered assets acquired from the FDIC are recorded at their discounted net present value and the resulting FDIC loss share indemnification provides significant protection against possible losses. Thus, FDIC covered assets are excluded from the computations of the asset quality ratios for our legacy loan portfolio. The allowance for loan losses equal 1.83% of total loans and approximately 215% of non-performing loans as of March 31st. Non-performing loans as a percent of total loans decreased from 102 basis points to 85 basis points. Non-performing assets as a percent of total assets were 114 basis points down 4 basis points from Q4 2011. Non-performing assets including TDRs as a percent of total assets were 1.48% compared to 1.52% in Q4 2011. These ratios continue to compare favorably to the industry and our peer group. In fact our non-performing assets to total asset excluding covered loans put us in the 80th percentile within our peer group. Based on December 31st tier once a again versus our March 31 [indiscernible]. The annualized net charge-off ratio for Q1 '12 was 66 basis points up some 17 basis points when compared to linked Q4 '11. Excluding credit cards, the annualized net charge-off ratio was 52 basis points compared to 24 basis points for Q4 '11. The net charge-off ratio was somewhat elevated in Q1 and Q2 charge also to credit relationships, both of which had specific reserves. We remain aggressive in the identification and quantification and resolution of problem loans. Our credit card portfolio continues to compare very favorably into the industry. In fact our Q1 2012 annualized net credit card charge-offs to loans decreased 45 basis points to 1.75% compared to 2.2% in Q4 2011. Our loss ratio continues to be more than 300 basis points below the most recently published credit card charge-off industry average at 4.97% and one of the real strengths of our credit card portfolio is and has been its geographic diversification, with low concentrations over 7% in any state other than Arkansas where we have approximately 40% of our portfolio. We are very conscious of the potential problems associated with high levels of unemployment and we continue to reserve accordingly. Despite our 1.75% loss ratio, we are currently maintaining our reserve of 3% for our credit card portfolio. As I mentioned at the beginning of this call the provision for loan losses was considerably lower than in previous quarters. For Q1 2012 the provision was $771,000 compared to $2.8 million for Q4 2011. Since the decrease was so significant, let me take a minute to discuss, our company has historically been very proactive in reserving for both known challenges as well as the uncertainties that come with an economic crisis. While we philosophically believe and I guess I philosophically believe that counter cyclical reserving is appropriate . It is obvious that the accounting profession and others do not embrace that theory. Likewise because our asset quality has historically and continues to be among the best in our peer group, our credit card portfolio loss ratio continues to be at levels below what we have historically reserved and because some of the previously reserved loans were upgraded and no longer require reserves and we have reduced our provision for the first quarter. Bottom line and we continue to experience good asset quality compared to the industry. Highlighted by our low credit card charge-offs allowing for lower than normal provision expense. Also efficiencies driven improvement in our non-interest expense and most importantly an extremely strong capital pace with a 10.7% tangible common equity ratio and risk based regulatory ratios that range in the 93rd percentile of our peer group, as Simmons First is well positioned based on the strength of our capital, asset quality and liquidity to capitalize on opportunities that will come with increased loan demand, rising interest rates, and/or acquisition opportunities. So in closing, we remind our listeners that Simmons First experiences seasonality in our quarterly earnings due to our agri lending and our credit card portfolio. Quarterly estimates should always reflect seasonality. Now, this concludes our prepared comments and we would like to now open the phone line for questions from our analysts and institutional investors. Let me ask our operator to come back on the line and once again explain how to queue in for questions.

[Operator Instructions] We will go first to Matt Olney with Stephens Inc.

Tommy, good to hear your comments on the pipeline, loan pipeline looking somewhat better, can you give us any more color as to what type of customer it is, it appears to be getting more optimistic and wanting to use more bank debt in the future?

Well, I think first of all we are seeing agri continues to be good, but that's a seasonally adjusted number that we can talk about a little later but we think we will continue to do well. But I think on the commercial side in the Central Arkansas region, and then I think we are seeing a little bit more activity on the consumer side in all of our regions but I think on the concerning some of the construction demands we're seeing in Central Arkansas [indiscernible] in a positive change.

And Tommy a lot of your Arkansas peers are discussing the intense competitive environment in the state and it's affecting it sounds like both loan yields and loan balances. Can you speak with competition from your point of view and give us an idea of how you are defending the market share that guys have?

Well, I think competition is certainly keen but I think it probably is and that lot of other areas just simply because there has been such low loan demand for such a long time and from a competitive standpoint, we see a lot of, I don't know that I would call it irrational pricing at this point, but certainly we see some very aggressive pricing probably more so on the terms, the length of the terms of the credit. And we certainly I would guess have seen some changes and maybe underwriting standards also. But I think the way we have tried to approach is first and foremost realizing that we've had several quarters of challenge in maintaining our portfolio. We have introduced a few special loan programs, one in agri and one in commercial and then another in consumer. And we have been relatively aggressive on the interest rate side of that particular program, not relative to under writing standards and I am sure that's what you would expect of us. And we've also tried to be fairly aggressive with that in our new markets of Missouri and Kansas, where we think that there is still some opportunities to be gained for us. So I guess protecting our TARP, we've tried to again compete where rates would allow us to compete, but certainly not compromise our standards and that's going to be a tough challenges as long as the demand stays as low as it is.

Okay, that's great color. I appreciate that. And Bob, as far as the margin with lots of moving parts given the seasonality that's always there, but also the additional yield accretion from the covered loans, can you give us an outlook for the margin for the next few quarters?

Matt, we have got the margin for this quarter was up probably 20 some basis points from the third quarter related to the accretion like you are saying. We look forward to the remainder of the year being somewhere in the range we are at from the 390 up to 410, 415 when we get into our peak season and our seasonality with agri and credit card. Obviously, loan pipeline will have a big impact on that. If we do see some more loans, we've got a lot of liquidity that if loans pick up that, that will get a benefit in there. We think right at this 4% range is where we will be the remainder of the year and that accretion over the next year or so goes off, it will have a negative impact on the margin, but we think the loans coming on as Mr. May said regarding the pipeline will replace that and will maintain right at this 4% level.

Matt, let me David Bartlett, I mentioned Central Arkansas region, you might say a word about what we are seeing in the Northwest Arkansas region also relative to maybe some improvement there.

Thanks, Mr. May. Matt, that was a good question and Mr. May is right we’re starting to really feel the solid bottom in Northwest Arkansas, have started seen a couple of the requests sort of coming in on some new commercial projects primarily owner/occupied, commercial building space, residential in the $150,000 to $200,000 range is appearing to start having some pickup with some new home, new roofs starting there. So that market starts to fill and firm up a little bit and start to show some positive signs of growth and then of course Northeast Arkansas just that market is just continuing to plug along, really seeing a steady increase in loan demand.

And David within Northwest Arkansas obviously that market had a lot of volatility the last few years, how would you classify the competitive environment in Northwest Arkansas versus other markets that you guys are in right now?

That's a good question. I will tell you everybody has been sitting on the sideline in Northwest Arkansas for so long as these new deals come up, it's they are attracting some attention, they are as Mr. May's already said we are going to stick with our credit underwriting and not let that slip, but I think pricing is going to be pretty aggressive as well.

Okay, guys. Those were all my questions. Thanks for the color.

We will go next to David Bishop with Stifel, Nicolaus.

A question for you obviously some weakness and related to some of the fee income numbers, service charges is going to be somewhat seasonal in nature I know in some relation, but any initiatives underway to offset some of the regulatory [indiscernible] that have come down in terms of that are affecting you on the transaction, on the fees side there to have to pass that through to the customer to try to offset those actions this year?

No, I don't think we have reached the point of introducing any fee increases in any of the areas to try to offset that. I think we are continually looking for new fee income opportunities. The time being that we won’t ultimately make some adjustments in some fees or possibly start charging some cities where we have not in the past, but I think at this point our focus has been to be as efficient as we can be on the noninterest expense side number one, and then number two to explore some opportunities that would generate some numbers. On a quarter-over-quarter basis I think we are relatively flat, except for those adjustments that were made as a result of the FDIC transaction.

Yes, the service charges on deposits were relatively flat as we said David, but some of that also is that first quarter is hard to get a judge on. Obviously what flows into their results are not only service charges and deposits but fee income from ODPs and so forth that first quarter there is more people filing electronically now and that has a significant impact in the first quarter more than it used to and so it's hard to judge. This is obviously we had a big impact from Reg E just like everybody else did over the last couple of years, all that's built into the numbers. Outside of service charges, we were pretty happy with the amount of interest income with credit card up, mortgage income up and other income.

Say our mortgage production unit has done better than we had anticipated, our [indiscernible] bank operation has done a little bit better. So that's on a positive side disguises it in an affirmative way and then obviously the offsetting increase to the accretion issue kind of [indiscernible] but specific to your question, we have not yet decided that we needed to make fee adjustments to try to offset that.

On the other side of the equation you alluded to the stringent expense controls there, as we sort of look out into 2012, 2013, should we expect relatively flat levels of operating expenses here on out?

Yes, I would tell you on the expense which you saw on the first quarter, you'll see that to down slightly each quarter going forward. We're still on the tail end of almost have all of initiatives implemented. We still have our loan administration that we're in the process of completing that centralization. Very pleased with how the implementation has gone overall but we're in that last phase right now and though I would expect, David you'd see that number of non-interest expense for the balance of the year being pretty close to what you saw in the first quarter maybe a little bit under those numbers.

It's Tommy, let me add something to that. I think it's still positive when you consider part of our strategy over next year while we're trying to bridge from this major recession and lack of loan demand and low interest rates. Part of our mission is to be able to take our capital, and put it to work in the form of acquisitions. And obviously there are two pieces that I’m sure you’ll want to talk a little bit about, both traditional and FDIC assisted, but the real advantage I think that during this lull, this lull period, becoming as efficient as we can be and centralizing some of the back office operations i.e. the duplicative expense that we had at the [indiscernible] banks will show even greater value going forward as we acquire other banks and that's something that gets a little bit lost in the numbers here. I see some real value once the acquisition portion of our program gets accelerated.

[Operator Instructions] We'll go next to Derek Hewett with KBW.

Given the fact that the pace of FDIC deals has slowed, I mean, in the past you've talked about going to looking more at traditional acquisitions kind of in the kind of present 2013, 2014 time period. Are you kicking the tires with traditional M&A deals at this time or do you still think that there is an opportunity for the FDIC deals over the next 12 to 15 months? Well, I'm going to ask David Bartlett to spend a little time talking about that but I just want to say at a high level that you know, M&A part of our past, part of our future and we had then said that on the traditional side and we felt like that the probabilities of success were in the out years of ’13 and ‘14, but that was more relative to the credit mark than to anything else, the challenges the bank had in their portfolios, and I'm talking about good banks that still had a few challenges to be able to do that traditional deal, and a deal with credit mark impact, we just saw that as being a big challenge for us. But that does not stop us and I'll let David speak to that, and lastly the FDIC deals, we're absolutely as advanced today as we were last year or if we ended the process in 2009 that the opportunities are going to be there, but we are in a political year. So Dave why don’t you start with traditional side, because I know you're doing a lot work right now in that area.

As you'll recall we talked over the last year about taking our in-state and out of state footprint and starting to what we call square it off, we wanted to look at the southern half of Missouri, then south eastern part of Kansas, the Eastern part of Oklahoma and then any fill in the blanks that we might have for footprint need within the state of Arkansas. Needless to say with locations in Kansas and Missouri already set, we're looking in taking a pretty hard look at the $250 million to a half billion asset size banks with good asset quality, to start with and you know, needless to say those are the banks that are not being pressed to sell but we are wanting to start planting seeds with those banks in those markets, to talk about the Simmons' culture and talk about our traditional margin acquisition activities over the last 10 to 15 years that have been very positive for our company. So that process is in place of identifying and quantifying and going out and meeting these banks and that's exactly what we're doing, we're meeting. We're not putting any proposals together right now we're just we're going out and getting in front of several different organizations to talk about our institution. As far as traditional merger and acquisition I mean so as far as FDIC, I'll be honest, we haven't seen an FDIC opportunity in the area we're interested in for the first quarter of this year. Our last due diligence was actually performed at the end of the fourth quarter of last year. You know Mr. May alluded to this as well, it's a political year I don't know how much that has to impact on closures, but I do agree with Mr. May and I don't think we're anywhere near the end of the FDIC closures and we haven't seen any failures to speak of this year but the problem -- the number of problem institutions is not declining.

And then also maybe this is for Bob, could you talk about the loan loss provision expectations going forward assuming that loan growth is relatively flat. You look at credit and there is really no issues there so we continue to expect that the provision will kind of be at this level assuming no material loan growth.

Derek, Tommy May, let me touch on that if I could -- and one of the things that I've said in the text there that, I personally, Tommy May, I’m a believer in counter cyclical reserving and also I believe - even under the old, system that we, try to operate under today that in this economy that you cannot identify and quantify, items in reserving like you once could but we all know that the accounting profession in general and others feel a little bit different and are very sensitive about levels of excess reserves. That’s a fact, that's way is and we have to live with that. So we also are sensitive to that. So in the first quarter when we saw that, number one our credit card charge-offs were significantly better than we had anticipated about the 171 [ph] basis, and we were reserving at 3% and then we had the couple off fairly large credits that were upgraded, during examinations and then we had a couple of credits that were of some size that we had aggressively put specific reserves against and we charged those down in anticipation of maybe moving those at some point and OREO area, that we in fact were going to have more excess reserves than maybe we'd be - maybe where we should be so. As a result of that we reduced our provision in Q1 and as you saw that provision is $775,000 compared to Q4 of $2.8 million. I think that from the standpoint of the go forward number – I try to think in terms of averaging that you are - that you take preferred the fourth quarter number and search for numbers and average those my guess is you'd come pretty close to what you would expect to see in Q2 and Q3 and Q4 assuming a that we did not see a significant increase in loans and are we did not see any kind of change in our extremely good asset quality or that we do not see any kind of change in our credit cards that would be my best answer.

[Operator Instructions] And everybody as we have no additional questions, I'd now like to turn the call back over to Tommy May, for any additional or closing remarks.

Okay, well I thank all of you for being here, and we look forward to next opportunity to present again. Have a great day.

And ladies and gentlemen, once again that does conclude today's call. We do appreciate everyone's participation.